Cyclical Unemployment, Structural Unemployment

Unemployment has emerged as a serious societal concern, attracting significant economic research. Several industries have been reformed and shrunk as a result of globalization, resulting in a shift for many employees from secure long-term employment to unemployment or unstable employment. The article investigates the reality of unemployment in both developed and emerging countries.

There are four sections to this study. The first section discusses the factors that contribute to unemployment. The second and third portions are devoted with research on different forms of unemployment and employment determination models. The fourth section provides a summary of research on the effects of unemployment. The main causes of unemployment are categorized into Classical supply side and Keynesian demand side factors. The supply side factors deal with the nature of the labor market and include real wage rates and unemployment benefits. The demand side factors that lead to unemployment include a weak aggregate demand for goods and services.

Types of unemployment


Both voluntary and involuntary unemployment fall under this category. The voluntary type of employment is whereby workers are unwilling to work at the ruling wage rate and opt out of employment to depend on other means. Involuntary unemployment refers to where people are willing to work at the market wage rate but are unable to secure jobs (Chadi 322).


It arises due to changes in business cycles. During depression and recession, there are high levels of unemployment. However, during the recovery and boom stages, there are elevated levels of employment. According to Keynesian economists, increasing the aggregate demand through expansionary monetary policies helps reduce cyclical unemployment (Diamond 430).


It is also referred to as search unemployment. This type of unemployment arises when workers are transitioning from one job to another or are seeking new jobs (Simon 720). New entrants into the job market often suffer this kind of unemployment. It also arises due to the seasonal nature of some jobs. For instance, workers employed during harvest periods may have to wait until the harvest season to secure jobs.


It is the kind of unemployment that a country may face due to changes in the structure of the economy. The structural changes occur when there are variations in technology. Technological changes may render the skills of workers redundant leading to a mismatch between the jobs available (Werding).


This unemployment occurs when the real market wage rate is higher than the equilibrium wage rate. The marginal cost of hiring an additional worker exceeds the marginal product and hence discourages the employers from hiring thus creating unemployment (Coen et al. 123)


The workers are visibly active but underutilized. Employees indulge in second choice non-employment activities e.g. housekeeping by women due to cultural norms. In hidden unemployment, the level of education attained by a worker does not match the available job opportunities. The fall in retirement age makes many active people go into early retirement and become underutilized (Cott et al. 233).

Economic models of Determining Employment


Flexible wages and full employment are some of the characteristics of this model. In a traditional economy there is consumer sovereignty, perfect competition, and economic efficiency. According to the flexible model, neither the consumer nor producer can solely influence the prices and wages in the market (Wolfson et al. 296). The level of employment is determined simultaneously by the forces of demand and supply. In this model, when the marginal product of labor exceeds the marginal cost then the producers demand more workers. On the supply side, the utility maximization principle determines the levels of employment (Sivramkrishna 32). Individuals divide their time between work and leisure in accordance to the relative marginal utility of each. More labor is supplied at successively higher wages.

In the figure below at W2 the supply of labor is greater than the demand for labor; therefore, wages fall leading to unemployment. At W1 the demand for labor exceeds the supply. Wages will rise leading to higher levels of employment.







The basis of this model is the relative prices of capital and labor. According to the price incentive school, the relative factor prices determine the optimum capital-labor combination (Nadiri 273). On the one hand, if the price of capital is high than the price of labor, a labor-intensive process is chosen. On the contrary, if the price of capital is lower than the cost of labor then a capital intensive technique is selected (Ezanne et al. 73). Such a method creates unemployment.


According to Harrod if output increases then employment should increase. Little domestic savings contribute to relatively minimal capital investment in the industrial sector thus leading to low output and unemployment. The model focuses on policy to increase the national output through accelerated capital formation (Van den Berg 16). It associates the levels of employment with the gross national product (GNP) growth. Maximizing the GNP growth raises the rate of labor absorption thus creating employment (Keating 27).

Consequences of unemployment

During unemployment, workers lose their skills leading to a loss of human capital. Unemployment reduces the life expectancy of employees and lowers the physical health outcomes of the unemployed (Ki et al. 540). Also, it increases the dependency ratio and the crime rate among youths (Burdett et al. 1770).


As seen from the above, unemployment is a significant macroeconomic variable. The main causes of unemployment are the demand or Keynesian factors as well as the supply or classical factors. There exist various types of unemployment raging from cyclical, structural and open unemployment. Three schools of thoughts exist that explain employment determination in an economy. Unemployment has significant implication to a society as a whole.

Works cited

Burdett, Kenneth, et al. "Crime, Inequality, and Unemployment." American Economic Review, vol. 93, no. 5, Dec. 2003, pp. 1764-1777.

Chadi, Adrian. "How to Distinguish Voluntary from Involuntary Unemployment: On the Relationship between the Willingness to Work and Unemployment-Induced Unhappiness." Kyklos, vol. 63, no. 3, Aug. 2010, pp. 317-329.

Coen, Robert M. and Bert G. Hickman. "Keynesian and Classical Unemployment in Four Countries." Brookings Papers on Economic Activity, no. 1, Jan. 1987, p. 123

Cott, Baum and Mitchell William. "Labour Underutilisation and Gender: Unemployment Versus Hidden-Unemployment." Population Research and Policy Review, no. 2, 2010, p. 233

Diamond, Peter. "Cyclical Unemployment, Structural Unemployment." IMF Economic Review, vol. 61, no. 3, 2013, pp. 410-455

Ezanne, Cécile and Laurence Saglietto. "Human Capital-Intensive Firms and Symbolic Value Creation." Timisoara Journal of Economics and Business, Vol 7, Iss 1, Pp 70-88 (2014), no. 1, 2014, p. 70

Ivramkrishna, Sashi. "Consumer Brand-Choice and the Equi-Marginal Principle of Utility Maximization: A Re-Conceptualization." Vision (09722629), vol. 10, no. 4, Oct-Dec2006, pp. 29-35

Keating, M. "Employment and the Growth of Australian Gross National Product." Economic Record, vol. 45, no. 109, Mar. 1969, p. 27.

Ki, Myung, et al. "Poor Health, Employment Transitions and Gender: Evidence from the British Household Panel Survey." International Journal of Public Health, vol. 58, no. 4, Aug. 2013, pp. 537-546.

Nadiri, M.I. "The Effects of Relative Prices and Capacity on the Demand for Labour in the U.S. Manufacturing Sector." Review of Economic Studies, vol. 35, no. 3, July 1968, p. 273.

Simon, Curtis J. "Frictional Unemployment and the Role of Industrial Diversity." Quarterly Journal of Economics, vol. 103, no. 4, Nov. 1988, pp. 715-728

Van den Berg, Hendrik. "Growth Theory After Keynes, Part I: The Unfortunate Suppression of the Harrod-Domar Model." Journal of Philosophical Economics, vol. 7, no. 1, Sept. 2013, pp. 2-23

Werding, Martin. Structural Unemployment in Western Europe : Reasons and Remedies. The MIT Press, 2006. CESifo Seminar Series

Wolfson, Paul and Dale Belman. "The Minimum Wage: Consequences for Prices and Quantities in Low-Wage Labor Markets." Journal of Business & Economic Statistics, no. 3, 2004, p. 296

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